The Chennai bench of Income Tax Appellate Tribunal (ITAT) observed that the special auditor highly followed the procedures prescribed by the Institute of Chartered Accountants of India while auditing ad that the Assessing Officer cannot simply reject or discard the special audit report merely for the reason that the findings in the special audit report are adverse/contrary to the appraisal report submitted by the investigation wing.
The assessee Mr. T.S. Kumarasamy, Prop: M/s Christy Fried Gram Industry (in short CFI) is engaged in the business of production and supply of weaning food/nutrient supplements to government schemes in Tamil Nadu.
The assessee filed the returns and the case was selected for scrutiny. Due to the complexities of the accounts, a special auditor was appointed under section 142(2A) of the Income Tax Act, 1961.
Both the assessee and the revenue has submitted 19 cross appeals against the order of the Commissioner of Income Tax (Appeals)[CIT(A)].
The Assessing Officer (AO) with prior approval of the Principal Commissioner of Income-tax, appointed M/s. Ramesh & Company for auditing the books of accounts of the assessee and to submit their report with regard to correctness of books of accounts maintained by the assessee for the purpose of computing taxable income.
The Special Auditor in light of the scope of audit assigned to them, has submitted their audit report for assessment year 2009-10 to 2019-20 and also prepared financial statements for the above period and submitted their report on 03- 12-2020.
The AO rejected Special audit report submitted by the auditor by stating that the special audit report suffered from infirmities in so far as the Special Auditor had to relied on the information furnished by the assessee himself which are false and contradictory and as evident from the ITR opening and closing balances and tally data seized during the course of search. Also mentioned that the AO is not binding on the special audit report.
Further observed that the special auditor who was not privy to the confidential findings of the search could not provide a true and correct picture, as the assessee’s modus operandi of manipulation was not in the domain of knowledge of the special auditor.
On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] accepted the special audit report and financial statement prepared for relevant assessment year on the ground that the financial statements prepared by the special auditor and reports submitted on correctness of financial statement by the special auditor was based on systematic and scientific method followed for preparation of financial statements.
Further, the assumptions employed by the special auditor were in accordance with Auditing Standards issued by the Institute of Chartered Accountants of India.
Being aggrieved by the CIT(A), the revenue is in appeal before the tribunal.
The Department Representative, M. Rajan, contended that the CIT(A) failed to appreciate that the AO has given various reasons for rejection of the special audit report.
As per the AO, the special auditor has conducted independent enquiries which were beyond the mandate of the special audit and he had to rely on the information furnished by the assessee himself which are false and contradictory, which is evident from the ITR opening and closing stock balances, and tally data seized during the course of search.
Further submitted that the special auditor is not privy to the confidential findings of the search and he could not provide a true and correct picture of accounts of the assessee as the modus operandi of manipulation employed by the assessee was not in the domino of knowledge of the special auditor.
The DR also argued that the special auditor has employed various assumptions in preparing financial statements and also adopted the financial year 2008-09 as base year and built accounts for all assessment years.
Therefore, the audit report submitted by the special auditor cannot give true and correct undisclosed income of the assessee and thus, the AO has rightly rejected the special audit report while completing assessment, but the CIT(A) without appreciating relevant facts accepted the special audit report in total which was incorrect.
On contrary, the assessee’s counsel submitted that it was the department and the Assessing Officer who had sought the special audit of the books of accounts of the assessee by stating that special audit of books of accounts is required considering the voluminous data and complexity of accounts of the assessee.
Further, the special auditor has been appointed by the department from the panel of auditors maintained by the department having considered their expertise, knowledge and experience in the field of audit.
The scope of audit work has been given by the Assessing Officer. Therefore, it was incorrect on the part of the Assessing Officer to reject the special audit report submitted by the auditor by stating that the special auditor was not having knowledge of the modus operandi of manipulation of accounts by the assessee.
The assessee’s counsel also submitted that just because the audit report is not in conformity with the opinion of the Assessing Officer or not in accordance with appraisal report, it cannot be said that a special audit report is not prepared in accordance with relevant accounting and auditing standards.
The bench V. Durga Rao (Judicial Member) and Manjunatha G. (Technical Member) observed that the special auditor has sought necessary confirmations from various persons with whom the appellant had transactions of purchases, sales, expenses etc., in accordance with the Standards on Auditing (SA)-505 prescribed by the Institute of Chartered Accountants of India (ICAI).
Also, such confirmations were sought in the normal course of the auditing process in accordance with auditing standards, as the terms of reference of the special audit included preparation of audit report in form 3CD and notes to accounts apart from preparation of final accounts.
With regards to the remarks of the AO that the special auditor made backward working of consumption of raw materials based on the quantum of production shown by the appellant, the tribunal stated that observed that the special auditor has not made any backward working.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
